Financial Education: the Cash Flow Statement

The Cash Flow Statement

cash flowA cash flow statement shows a company’s cash inflows and outflows and the overall change in its cash balance during an accounting period.

One of the quarterly financial reports any publicly traded company is required to disclose to the SEC and the public. The document provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter. – Investopedia

Because public companies tend to use accrual accounting, the income statements they release each quarter may not necessarily reflect changes in their cash positions. For example, if a company lands a major contract, this contract would be recognized as revenue (and therefore income), but the company may not yet actually receive the cash from the contract until a later date. While the company may be earning a profit in the eyes of accountants (and paying income taxes on it), the company may, during the quarter, actually end up with less cash than when it started the quarter. Even profitable companies can fail to adequately manage their cash flow, which is why the cash flow statement is important: it helps investors see if a company is having trouble with cash. – Investopedia

The cash flow statement is separated into three sections: operating activities, investment activities and financing activities. The statement shows cash outflows in parentheses to designate a negative number. Each section’s net cash flow, or total cash flow, is shown at the bottom of the section. Positive net cash flow from a section means a business generated more cash than it spent on that section’s activities. Negative net cash flow means the business spent more than it generated on those specific activities. – Bryan Keythman

As you can see, if a company has a negative ending cash flow the company might be in trouble. The true beauty of knowing how to read a cash flow statement, is that a company CANNOT flub the numbers or “interpret” the data. It’s straight numbers and arithmetic. The other quarterly statements can be “interpreted” and manipulated to put a good light on the company’s quarterly endeavors.


If you work for a publicly traded company, go online, if you can, and try to find their quarterly cash flow statement. It might shed light on whether the company is actually healthy or not.